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Options (Puts/Calls) Flashcards

1
Q

Define - Options

A

Options are contracts giving the investor the right (not obligation) to buy/sell a security at a set price.
- Options can be exercised, traded, or let expire
- And they look a little like this

Ex - ‘Buy 1 XYZ Apr 60 call at 5’

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2
Q

Reading an option - Buy or Sell

Buy 1 XYZ Apr 60 call at 5

A

Buyers have the power to exercise the option; sellers must live up to the agreement (buy or sell) if exercised.
The Buy in ‘Buy 1 XYZ Apr 60 call at 5’

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3
Q

Reading an option - Contract size

Buy 1 XYZ Apr 60 call at 5

A

One contract is 100 shares (lot), if an option reads 5, that’s 500 shares
The 1 in ‘Buy 1 XYZ Apr 60 call at 5’

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4
Q

Reading an option - Ticker

Buy 1 XYZ Apr 60 call at 5

A

Underlying stock that’s part of the deal.
The XYZ in ‘Buy 1 XYZ Apr 60 call at 5’

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5
Q

Reading an option - Expiration

Buy 1 XYZ Apr 60 call at 5

A

Contracts can be purchased for days, weeks, and months. Also come in long term options known as LEAPs. Options always expire the third Friday in a month at 4PM EST.
The Apr in ‘Buy 1 XYZ Apr 60 call at 5’

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6
Q

Reading an option - Strike Price

Buy 1 XYZ Apr 60 call at 5

A

The price at which the owner (purchaser) of the option can exercise their right (force buy/sell)
The 60 in ‘Buy 1 XYZ Apr 60 call at 5’

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7
Q

Reading an option - What are the 4 main types of option contracts ?

A

-Investors can buy or sell a call option; buy or sell a put option.
§ Calls give the investor the option (right) to buy at a set price
§ Puts give the investor the option (right) to sell at a set price

The Call in ‘Buy 1 XYZ Apr 60 call at 5’

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8
Q

Define Bearish?

A

Bearish believe the security is worth less and want the price to decrease

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9
Q

Define Bullish

A

Bullish believe the security is worth more and want the price to increase

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10
Q

When is a CALL Option in the money, at the money, and out of the money?

A

In - when the market price is above the strike price
At- when the market price is the same as the strike price
Out- when the market price is lower than the strike price

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11
Q

When is a PUT Option in the money, at the money, and out of the money?

A

In - when the market value is lower than the strike price
At- when the market mirrors the strike price
Out - when the market is higher than the strike price

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12
Q

Reading an option - Premium

A

The buy in, how much the investor puts down to secure the option, this is paid per share so 100 shares x 5 premium = $500.
The 5 in ‘Buy 1 XYZ Apr 60 call at 5’

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13
Q

Define - Call Options (Buyer)

A

Contract granting the right to BUY - A Call option allows a buyer (the owner) the right (but not obligation) to purchase a lot(s) (100 shares) of a security at a fixed price.

Call Buyers make their money by selling the contract or exercising when in the money

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14
Q

Define - Call Options (Seller)

A

Contract granting the right to BUY -A Call option sold to a Call buyer will obligate the seller to sell securities at a fixed price if exercised.

Call Sellers make their money from keeping the premium if the contract is never exercised and out of the money.

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15
Q

Define - Put options (Buyer)

A

Contract granting the right to SELL - A Put option allows a buyer (the owner) the right (but not obligation) to sell a lot (100 shares of a security) at a fixed price.

Put Buyers make their money by exercising the contract selling higher than the market price.

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16
Q

Define - Put options (Seller)

A

Contract granting the right to SELL - A Put Seller is obligated to buy securities at a fixed price if the buyer of the put exercises the contract.

Put sellers make their money from keeping the premium paid by the buyer

17
Q

Determine which CALL option is in the money- build your own problem!

ABC stock trading at (1-100 market price)

A

ABC strike price (0-100 lower than market)
ABC strike price (0-100 Higher than market) <–
ABC strike price (0-100 lower than market)

18
Q

Determine which PUT option is in the money- build your own problem!

XYZ stock trading at (55)
Put options strike price are 60, 50, and 55

A

XYZ strike price 60 because the market is lower than the strike

19
Q

What does the term ‘Call Same’ mean?

A

In an options chart for Calls - Strike price and Premium go on the same side

20
Q

What does the term ‘Puts Switch’ mean?

A

In an options chart -Premium and Strike Price on Opposite sides

21
Q

Define - Call up

A

Breakeven is the strike plus premium

22
Q

Define - Put down

A

Term used to remember the Breakeven is the strike minus the premium for PUT options.

23
Q

When is an option profitable? In the money

A

In - the market value is past the strike price allowing the investor to buy a security for less or sell for more.

24
Q

What does the term At the money mean?

A

The market value is the same as the strike price breaking even, no gain, no loss.

25
What does the term Out of the money mean?
The market value is not past the strike price, f or a call the market is less, for a put the market is more.
26
What does the term Long the option mean?
The person buying the rights to buy/sell - This person paid the premium and hopes the stock price goes in their direction
27
What does the term Short the option mean?
The person selling the rights to buy/sell - This person hopes the option expires or is out of the money, so they keep the premium.
28
What factors can affect the Premium of an option?
The premium may increase or decrease depending on if it is in the money, out of the money, or close to expiring. Other factors include § Amount of time the investor has to use the option § Volatility of the underlying security § Investor sentiment (is it the hot thing to do)
29
What is the purpose of calculating the value of an option premium over time?
The purpose of calculating the value of an option premium over time is mainly to understand how the option's price behaves as it approaches expiration. This helps investors and traders make smarter decisions about when to buy, sell, or hold an option. Options with LATER expirations have HIGHER premiums (generally)
30
What is the formula to calculate Value of an option premium over time?
P = I + T P= Premium I= Intrinsic value T= Time value You slot in the numbers given and the do the math to calculate the missing variable. Ex, you may be given premium 6 with strike 30 on a call and market is 33 (intrinsic value is 3). 6 = 3 + T now just find the missing variable of T which is 3.
31
What does the term 'intrinsic value' mean?
This number is used to describe how 'in the money' an option is. This number cannot be negative, the lowest is zero. Ex. A call option for ACB stock with strike price of 50 is 3 points in the money if the market value is 53. The intrinsic value is 3 Ex. A put option for XYZ stock with strike price 70 is in the money 7 points if the market value is 63. The intrinsic value is 7
32
What is the options chart used for ?
The chart allows you to pick and choose options contracts based on your strategy. It calculates: ○ Gains and losses ○ Breakeven points ○ Maximum Gains and Losses It is also known as the 'options chain' that shows all available options contracts for a stock (or ETF) organized by: ○ Strike price ○ Expiration Date ○ Call options ○ Put options ○ Premiums
33
What is the layout of the Options Chart
Money out on the left - any money leaving your pocket goes here Money in on the right - any money going into your pocket goes here
34
How do you calculate maximum gain, maximum loss, and breakeven point of a Call option BUYER? Ex; 1 XYZ Oct 40 Call at 5
Max loss is calculated by multiplying the premium by lot. This is money out, so it goes on the left of the options chart. In the above the premium is 5 x 100 shares = $500 is the max loss Max gain is calculated by multiplying the strike by the market price. This is money out because as the buyer you are paying for shares at the strike price so this goes to the left of the chart. In the above 40 strike x 100 shares = 4000 Max gain. Breakeven is calculated by adding the Strike and Premium 40 + 5 = 45 the market price has to be for the investor to break even and cover his premium NOTE - Calls Same (Strike price and Premium go on the same side)
35
How do you calculate maximum gain, maximum loss, and breakeven point of a Call option SELLER? Ex; Sell 1 ZYX Oct 60 call at 2
Max gain will be the premium x lot size so 2 x 100 = 200. This goes in the money in right side of the options chart, Max loss will be the strike x lot size so 60 x 100 = 6000. This also goes on the right side since that is what the seller of a call would be forced to sell at. Breakeven is calculated by adding the strike and premium so 60 + 2 = 62 NOTE - Calls Same (Strike price and Premium go on the same side)
36
How do you calculate maximum gain, maximum loss, and breakeven point of a Put option BUYER? Ex: Buy 1 TUV Oct 55 Put at 6
Max loss - Buyers of options are capped to what they can lose to the premium amount paid. So in this example 600. This goes on the left side of the chart since it is money leaving your pocket. Max Gain - Buyers can exercise the Put option to sell at the strike price. Multiply the strike price 55 by the lot size 100 to get 5500, BUT THEN YOU MINUS THE PREMIUM giving you max gain of 4900. This goes on the right side of the chart because it is money coming in from a sale. The breakeven price for Puts is the Strike minus the Premium so 55-6= 49. The stock has to go to 49 a share for this to breakeven. NOTE - Puts switch - Premium and Strike Price on Opposite sides of the chart
37
How do you calculate maximum gain, maximum loss, and breakeven point of a Put option SELLER? Ex: Sell 1 TUV Sep 30 Put 8
Max gain - Multiply the premium rate by Lot size = 8 x 100 = 800 Gains go on the right side of the options chart because that is money in your pocket! Max loss - Multiply the Strike by the Lot and subtract the premium. 30 x 100 = 3000 - 800 = 2200 is the max loss (Short putter is forced to buy at the strike price) This goes on the left because you are spending money out your pocket to pay for. Breakeven - will always be Strike minus premium 30 - 8 = 22 Breakeven NOTE - Puts switch - Premium and Strike Price on Opposite sides

Securities Industry Essentials (12 decks)

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